9. Chrustuba Inc. is evaluating a new project that would cost $8.0 million at t= 0. There is a 50% chance that the projectwould be highly successful and generate annual after-tax cash flows of $5.4 million during Years 1, 2, and 3. However,there is a 50% chance that it would be less successful and would generate only S1 million for each of the 3 years. If theproject is highly successful, it would open the door for another investment of Ss10 million at the end of Year 2, and thisnew investment could be sold for $20 million at the end of Year 3. Assuming a WACC of 8.5%, what is the project'sexpected NPV (in thousands) after taking into account this growth option? Do not round intermediate calculations.a. $3,942b. $4,318c. $4,506d. S3,755e. $3,37910. Games Unlimited Inc. is considering a new game that would require an investment of $21.0 million. If the new gameis well received, then the project would produce cash flows of $9.5 million a year for 3 years. However, if the market doesnot like the new game, then the cash flows would be only $5.0 million per year. There is a 50% probability of both goodand bad market conditions. The firm could delay the project for a year while it conducts a test to determine if demandwould be strong or weak. The project's cost and expected annual cash flows would be the same whether the project isdelayed or not. If the WACC is 9.2%, what is the value (in thousands) of the investment timing option? Do not roundintermediate calculations.a. $1,356b. $1,288c. $1,492d. $1,627e. $1,424

Net present value (NPV) is the present value of cash flows. It is the difference between the value…

9. Chrustuba Inc. is evaluating a new project that would cost $8.0 million at t= 0. There is a 50% chance that the project would be highly successful and generate annual after-tax cash flows of $5.4 million during Years 1, 2, and 3. However, there is a 50% chance that it would be less successful and would generate only S1 million for each of the 3 years. If the project is highly successful, it would open the door for another investment of S10 million at the end of Year 2, and this new investment could be sold for $20 million at the end of Year 3. Assuming a WACC of 8.5%, what is the project's expected NPV (in thousands) after taking into account this growth option? Do not round intermediate calculations. a. $3,942 b. $4,318 c. S4,506 d. S3,755 e. $3,379

9. Chrustuba Inc. is evaluating a new project that would cost $8.0 million at t= 0. There is a 50% chance that the project would be highly successful and generate annual after-tax cash flows of $5.4 million during Years 1, 2, and 3. However, there is a 50% chance that it would be less successful and would generate only S1 million for each of the 3 years. If the project is highly successful, it would open the door for another investment of S10 million at the end of Year 2, and this new investment could be sold for $20 million at the end of Year 3. Assuming a WACC of 8.5%, what is the project's expected NPV (in thousands) after taking into account this growth option? Do not round intermediate calculations. a. $3,942 b. $4,318 c. S4,506 d. S3,755 e. $3,379

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Alpha Industries is considering a project with an initial cost of $8.5 million. The project will produce cash inflows of $1.51 million per year for 9 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 5.76 percent and a cost of equity of 11.37 percent. The debt-equity ratio is .65 and the tax rate is 40 percent. What is the net present value of the project?
You have a potential project for which you want to establish the value of any possible real options. The project will have an initial cost of $86 million, which must be paid at the time of investment. You realize that the project has four possible cash flows starting in year 1 and continuing forever. First, there is a 22% chance of earning $1.02 million per year starting in year 1. Second, there is a 26% chance of earning $6.54 million per year starting in year 1. Third, there is a 20% chance the the project will earn $5.82 million per year. Fourth, there is a chance that the project will earn $3.22. These are the only four possibilities. In 2 year(s), you will be able to improve the quality of your manufacturing process to increase the net CFs from the project if you would like to. The cost of this will be $62 million, and the cash flows will increase beginning immediately when you make this investment (the CFs increase starting the same year that you pay the improvement cost) and…
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A firm is considering taking a project that will produce $12 million of revenue per year. Cash expenses will be $5 million, and depreciation expenses will be $1 million per year. If the firm takes that project, then it will reduce the cash revenues of an existing project by $3 million. What is the free cash flow on the project, per year, if the firm uses a 40 percent marginal tax rate? O$2.8 million O $2.4 million 0 $4.6 million $3.4 million
1. (Ignore income taxes in this problem.) ABC Co. is considering an investment opportunity having cash flows as described below: Project I would require an immediate cash outlay of $10,000 and would result in cash savings of $3,000 each year for 8 years. Required: If ABC Co. has a required rate of return of 14%, determine if the project is acceptable. Use the NPV method.
A long term efficiency project will cost $837 today but will not yield any return for for 3 years (Cashflows at time (1) and (2) = 0). At time (3), the project will yield a positive cashflow of $1,079. What is the efficiency project's internal rate of return?
A project that costs $1000 today is expected to have cash flows of $200/year for 10 years. Under these projections, this is a positive NPV project: if your cost of capital is 10%/year, investing $1000 today and earning $200 per year for 10 years yields an NPV of $228.91 (you can verify this yourself, or take my word for it). However, those annual cash flows of $200 are based on the following expectations: A 50% probability that business will be good and the project will earn $300/year, and a 50% probability that business will be bad and the project will earn $100/year. (Note that the expected annual cash flows will be: [0.5 * $300] + [0.5 * $100] = $200/year, as stated above.) Unfortunately, you will not know which state of the world you will be in until you spend the $1000 and start the business; in year 1, after the business opens, you will find out. Obviously, if you open for business and business is good, you will want to stay open for the entire 10 years; if your cost of capital…
6. Lucron Corp. is considering a project that will cost $310,000 and will generate after-tax cash flows of $96,000 per year for 5 years. The firm's WACC is 12% and its target D/E ratio is 2/3. The flotation cost for debt is 4% and the flotation cost for equity is 8%. What would be the new cost of the project after adjusting for flotation costs? A) $328,390 B$329,787 $331,197 D) $329,840 E) $290,160 7. When calculating weights for the WACC, it has become relatively common to use Net Debt. How is Net Debt calculated? A) Net Debt = Total amount of debt - Cash & Risk-Free Securities B) Net Debt = Total amount of debt + Cash & Risk-Free Securities C) Net Debt = Long-term Debt - Short-term Debt D) Net Debt Short-term Debt-Long-term Debt E) Net Debt- Long-term Debt-Short-term Debt + Cash & Risk-Free Securities Please use the following information to answer the next THREE questions. LNZ Corp. is thinking about leasing equipment to make tinted lenses. This equipment would cost $3,400,000 if…
The private firm TranspCom needs to invest $300 million to a freeway construction and management project on year 2, and $50 million less than previous year each year from year 3 through year 6. What is the present worth of all these potential investments? (Suppose the annual rate of return is 12%)
A company just paid $10 million for a feasibility study. If the company goes ahead with the project, it must immediately spend another $108,168,164 now, and then spend $20 million in one year. In two years it will receive $80 million, and in three years it will receive $90 million. If the cost of capital for the project is 11 percent, what is the project’s NPV? 10.6.1 nn
Berra, Inc. is currently considering a seven-year project that has an initial outlay or cost of $120,000. The future cash inflows from its project for years 1 through 7 are the same at $30,000. Berra has a discount rate of 11%. Because of capital rationing (shortage of funds for financing), Berra wants to compute the profitability index (PI) for each project. What is the PI for Berra's current project?

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